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BM/NOV2005/EC0415

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

ECONOMICS ECO415 NOVEMBER 2005 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. 2. 3. 4. This question paper consists of two (2) parts: PART A ( 2 Questions) PART B ( 4 Questions)

Answer ALL questions in PART A and only two (2) questions from PART B in the Answer Booklet. Start each answer on a new page. Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) the Question Paper ii) an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 6 printed pages
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PART A (50 MARKS)

QUESTION 1

TABLE 1: INCOME ELASTICITY OF DEMAND FOR VARIOUS FOODSTUFFS Foodstuff Income elasticity of Demand Milk -0.40 Cheese 0.19 Eggs -0.41 0.94 Fruit juices Fresh fruits 0.48 nd >\dapted from J. Sloman, Economics, 2 ed TABLE 2: ESTIMATED PRICE ELASTICITY OF DEMAND FOR VARIOUS GOODS AND SERVICES Good / Service Price elasticity of Demand Salt 0.10 Coffee 0.25 Tobacco products, short-run 0.45 Taxi, short-run 0.60 Restaurant meals 2.30 Foreign travel, long-run 4.00 Airline travel, long-run 2.40 Chevrolet automobiles 4.00

>\dapted from http://www.mackinac.org/article.asp

a)

What is demand? Using a diagram, explain the shape of a normal demand curve. (6 marks)

b)

Based on Table 1, explain the difference between income elasticity of demand for eggs and that for fruit juices. (6 marks) Discuss the implications on the revenues of fresh fruits producers when national income increases. (3 marks)
Based on Table 2, explain the difference between price elasticity of demand for salt and that for Chevrolet automobiles. (6 marks)

c)

d)

e)

How would the knowledge of price elasticity of demand be important for a business if it is producing on the price elastic section of the demand curve? (4 marks)
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QUESTION 2

Balance of Payments: January - March 2005

The first three months of 2005 saw a decline of 42.2% in the surplus of the overall balance of payments to RM21.6 billion from that of RM37.4 billion in the last quarter of 2004. The current account surplus surged to RM20.9 billion, the highest among the other quarters, while the financial account recorded a significantly lower net inflow of RM3.3 billion from RM10.1 billion previously.

The current account surplus surged mainly due to a higher net inflow in the goods account. While the goods account rose to RM32.8 billion from that of RM26.9 billion in the previous quarter, the services account continued to record a wider deficit to report at RM3.4 billion from RM2.8 billion.
Adapted from Malaysian Department of Statistics, July 2005

Malaysia FTA hits roadblock over cars Negotiations over a free trade agreement between Japan and Malaysia have hit a speed bump over cars due to Kuala Lumpur's determination to continue protecting its local industry. Former Malaysian Prime Minister Mahathir Mohamad spearheaded the country's "national car project" in the 1980s to foster domestic automakers, aiming to make the car industry a key sector of the economy. While the nation's automakers are required to procure most of their parts within the country, they receive favorable tax treatment. The policy is aimed at protecting the Malaysian car market from imported cars or locally made foreign vehicles. Adapted from www.bilaterals.orq/article. April 2005

a)

What is balance of payments? Briefly describe the structure of balance of payments.

(6 marks)

b)

The first three months of 2005 saw a decline in the surplus of the overall balance of payments. What does this mean and how does it affect Malaysia's official reserves? (4 marks)

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c)

"Negotiations over a free trade agreement between Japan and Malaysia have hit a speed bump over cars due to Kuala Lumpur's determination to continue protecting its local industry."
i) What is meant by free trade and explain in detail two (2) of its benefits.

(6 marks)
ii) Discuss two (2) ways how the Malaysian government can protect its local industry. (5 marks)

d)

Other than protecting local industry, explain two (2) other reasons for protectionism. (4 marks)

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PART B (50 MARKS)

QUESTION 1

a)

Why is it likely that the price of a good or service will be fixed at the point where demand equals supply? Cite some examples where this is not the case. (15 marks)

b)

"Individuals and societies always incur opportunity costs". Using examples, explain the above statement. (10 marks)

QUESTION 2

a)

Explain the following: i) short-run and long-run production

(3 marks) ii) iii) fixed and variable costs (3 marks) average and marginal costs (3 marks) b) Differentiate between the Law of Diminishing Marginal Returns and Law of Returns to Scale. (6 marks) "Under conditions of perfect competition, a firm's price is likely to be lower and its output is likely to be higher than in monopoly conditions". Using a diagram, explain the above statement. (10 marks)

c)

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QUESTION 3

a)

Describe the methods which might be used to calculate national income of a country and explain three (3) difficulties involved in the calculation. (15 marks)

b)

Discuss how national income statistics can be useful to the government of Malaysia.
(10 marks)

QUESTION 4

a)

The government wishes to reduce unemployment. What actions can be used to achieve this objective? (15 marks)
Explain what is meant by inflation and examine the different factors which may give rise to this problem. (10 marks)

b)

END OF QUESTION PAPER

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